DEFINITION of 'Prepaid Finance Charge'

Charges on a loan agreement which are not included as part of the principal amount being borrowed. Prepaid finance charges can include such things as administration fees, loan insurance and discount points. As these expenses are not a part of the "asking amount," they are considered to be prepaid in nature. These expenses typically must be paid by the borrower at the time of loan closing.

BREAKING DOWN 'Prepaid Finance Charge'

Prepaid finance charges, or closing costs as they are also commonly known, are common in lending agreements, including mortgage borrowing. While not directly incorporated in the cost of borrowing calculation for a loan, these expenses do affect the APR, as upfront fees should be included in the total cost of borrowing statement given to borrowers at loan signing, as is stated in Truth In Lending documentation.

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